The future of second charge after COVID-19


By Marie Grundy, Managing Director, Second Charge Mortgages, West One Loans.

The second charge market was hit hard during the pandemic, hitting a crisis low of £21m in May 2020 as a direct result of the economic fallout. This followed on from the challenges presented by the pandemic which resulted in a reduced number of lenders actively originating new business offering limited product ranges and a tightening of credit policies across the board designed to reduce the potential for consumer detriment.

However, the market has rebounded quickly, the value of second charge business in June was reported as £91m by the Finance and Leasing Association (FLA), equating to a 333% increase in value compared to May 2020.

It is also worth highlighting that the bounce back in second charge lending was not predicated on the stamp duty holiday which as we know fueled extraordinary demand in the first charge market. This suggests that the recovery we are now experiencing is sustainable growth.

It also highlights the resilience of brokers that support the second charge market who have managed to navigate their way through a challenging period and are now thriving under the improved market conditions.

So just what is driving this business and how has the second charge market been changed by the pandemic?

Pent up demand

We are now seeing pent-up demand from borrowers particularly those looking to consolidate debts, take out home improvement loans and raise money towards the purchase of second homes and investment properties. As a result of the pandemic, more and more people are working from home and taking the time to reconsider their lifestyles, meaning borrowers are looking to suitably update their properties to meet their changing circumstances.

A new type of borrower

Second charges are often misrepresented as only being suitable for borrowers who can’t obtain finance elsewhere, but this is simply not the case. At West One, we have noticed a change in the profile of borrowers coming to us for second mortgage finance. who are not the stereotypical ‘second charge borrower’. For example, borrowers that own high value properties wishing to undertake high end home improvement projects are benefiting from the flexibility that second charge can bring, particularly in regard to loan size which are often available up to £500,000 and above in some circumstances.

Quick access to equity

There has also been a notable increase in borrowers using second charge products to finance the purchase of an additional property, while the stamp duty holiday may have contributed to this increase it has also demonstrated the benefits of using second charge for this purpose. Second charge allows quick access to equity and allows the borrower to have more flexibility around their choice of conveyancing partner instead of relying on a panel conveyancer which borrowers are more likely to need to do with a remortgage.

Underwriting for the self-employed

Another group of borrowers that are benefitting from our second charge products post-pandemic is self-employed borrowers. As our cases are individually underwritten, we can really dig deep and understand each individual’s circumstances – what line of business they are in, how they were able to continue trading during covid and how sustainable that income is going forward so we can seek to help those borrowers who can demonstrate long term affordability taking into account all of their individual circumstances.

The bank of Mum and Dad

Earlier this year Halifax reported that the average first-time buyer puts down a deposit of £59,000. It comes as no surprise then that a growing number of first-time buyers are reliant on financial support from their families. We’ve noticed an increase in borrowers using second charge mortgages to support family-assisted borrowing rather than using their savings. West One have bought out specific criteria to support this kind of borrowing.

We see second charge mortgages playing an increasingly important role for mortgage brokers, providing a new way to engage with the customers and provide a range of new product options to meet a wider range of borrowing needs.

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